Buxton leaving Schroders, Woodford leaving Invesco, Gross leaving PIMCO. Such high-profile manager departures—and lower profile moves—can consume newspaper inches and unnerve fund investors.
For the many investors who own a fund that is set to be orphaned, the decision is a personal one: What should I do? Some investors appear to not spend much time deliberating: The Wall Street Journal reported that investors withdrew $10 billion from PIMCO Total Return on the day Bill Gross’ exit was announced, and additional redemptions have likely followed this week.
While fleeing investors may be trying to avoid any blowback from further redemptions, it's usually wise to step back and be deliberate when your fund undergoes a management shift. You'll want to take stock of your own personal situation, as well as size up the particulars of the fund at hand. Gross' fund was idiosyncratic and personality-driven, but other funds are much more tightly constrained, meaning that the departure of any one individual will tend to be less important.
If you're a PIMCO Total Return investor trying to plot your next move, or simply own other funds, here's a checklist to use to ensure that you make a well-considered decision.
Will I incur transaction costs if I sell and/or buy something else?
Your first consideration when determining whether to sell a fund following a manager change is your economic position and how a trade might affect it. If you'll face either tax or transaction costs to make a change, consider them your "hurdle rate"; the investment you swap into will need to beat those costs for you to break even.
So, your first step is to consider your transaction costs. Will you incur any transaction costs to sell your current holding and buy another one?
Is the fund actively managed or does it track an index?
This is an easy one. Because tracking a market benchmark tends to be much more science than art, a manager departure at an index fund is usually a non-event. As long as everything else about the index fund is staying the same—the expenses it charges, the index it tracks—investors have no reason to worry if the person managing the portfolio changes. By contrast, a manager change at an actively managed portfolio could have meaningful repercussions for performance.
Is the fund tightly constrained or more free-ranging?
Even if your fund is not an index fund, a manager change isn't likely to be a big deal if it employs a tightly constrained strategy. Most of Vanguard's actively managed bond funds are a good example: Their managers stick pretty closely to their benchmarks; the goal is to let low expenses, rather than fancy footwork on the part of managers, differentiate their returns from their peers. PIMCO Total Return, by contrast, was a highly idiosyncratic portfolio under Gross, with the latitude to veer significantly from the Barclays Aggregate Index, for better and for worse. A manager change at such a fund is more significant, and more concerning, than one at a fund with a more vanilla strategy because it could be difficult for the new manager to replicate the more idiosyncratic strategy. He or she may lack the skills to do so, or may simply not be given the same flexibility that the more experienced manager was able to exercise.
Could a cult of personality trigger redemptions?
This question will tend to follow from the preceding one. If your fund manager employed a highly idiosyncratic strategy and was successful at it, other investors may feel a sense of loyalty. That could prompt them to sell in the wake of a manager departure because they assume the new skipper won't have the same 'secret sauce' that the prior one did. If enough investors dump their shares, that can start to have implications for the way the portfolio is managed. The new manager may be forced to dump securities that he or she would have preferred to hang on to, settling for lower prices than would be ideal. Such forced selling is a particularly big risk if the manager traffics in less-liquid securities where there's not a huge pool of buyers on a given day, such as tiny-cap stocks or exotic bond types. Selling shares into an unwelcome market could mean the new manager will have to settle for lower and lower prices. Alternatively, the manager might maintain a larger-than-average component of liquid assets to head off such a risk. The downside, however, is that doing so will mute any gains that occur in the fund's asset class while this is going on.
Do the successors have a proven track record?
Even if your manager had great success with a unique style, all might not be lost if he or she worked closely with analysts or co-managers who are steeped in the same style and will be stepping in as successors. A best-case scenario would be one where the successor has been working alongside the departing manager, and has proven strong results at another, similarly styled fund. Succession strategy doesn't always unfold so elegantly, unfortunately.
What's likely to change?
Even if you're satisfied that the new manager is experienced, it's still worth assessing what might be different about the fund once he or she takes over, and whether that could affect its role in your portfolio. Was the new manager the firm's lead emerging-markets analyst before taking over, and will he or she, as a result, give such names greater emphasis in the portfolio? Is a management team taking over for a solo manager? This could have the effect of reducing the fund's positions in individual names. Morningstar analysts work to uncover what might be different about a new fund manager's strategy and discuss it in their analyst reports.
Are there worthy alternatives?
If you're leaning towards selling, it's worth spending some time acquainting yourself with substitute funds. If your former fund manager employed a style that's difficult to replicate in-house, chances are you'll be hard-pressed to find good substitute funds outside of that shop, too. When Neil Woodford left Invesco Perpetual to set up his own firm, the new Woodford Equity Income fund was quickly awarded a Bronze rating by Morningstar analysts, in part thanks to a strategy that is identical to that used by Woodford at the Invesco income funds that he ran with high conviction, patience and passion. The funds Woodford left behind, however, were both downgraded by Morningstar to Neutral from Gold as although new manager Mark Barnett is a talented fund manager with a strong track record on similar mandates, there remains uncertainty around how changes to the investment process and portfolio construction will impact the fund.
Morningstar's category system, combined with these analyst ratings, can help you home in on the best funds within a given peer group. And even if you uncover a short list of worthy alternatives, it's still important to understand the ways in which alternative funds differ from the one you'll be selling and, in turn, what implications that might have for your total portfolio's positioning.
